Don’t Worry Too Much About the Debt Ceiling

We interrupt your summer vacation with a fiscal-emergency bulletin: By mid-October, according to the Treasury Department, the U.S. will reach its borrowing limit. Congress must act “as soon as possible to protect America’s good credit,” Treasury Secretary Jack Lew warned this week.

Only two problems. First, Congress isn’t due back until Sept. 9, and when it returns, it will have just three weeks to pass a budget. Second...well, this isn’t really a fiscal emergency. It’s more of a perennial Washington story. We’ve all heard these warnings before, and we pretty much know the script. We even have a pretty good idea how it will end.

The next round of debt and deficit negotiations will take place in the context of modest but steady growth in a $16.6 trillion economy and a declining budget deficit -- to 4.2 percent of gross domestic product as of June from more than 10 percent of GDP in 2009. In effect, Republicans already can claim victory for the rapidly shrinking shortfall. It makes no sense to jeopardize the expansion that most economists predict will result if government spending is stabilized.

Apparently that’s too much to ask. When Congress resumes its session, there will be blood, metaphorically speaking. House Republicans will demand spending reductions above the amount by which the debt ceiling is lifted. Democrats will insist on a debt-limit increase with no strings attached and restoration of some of the education, public-works and research-spending cuts made during the last fiscal go-round. Republicans will allow absolutely no tax increases, Democrats absolutely no entitlement cuts.

It’s unlikely, however, that they will refuse to compromise. One reason is that not even conservatives have the stomach for a government shutdown. As Senator Richard M. Burr of North Carolina put it, a plan to defund President Barack Obama’s health-reform law in exchange for keeping the government running is “the dumbest idea I’ve ever heard.” And he’s a Republican.

The same could be said of letting the U.S. hit the debt ceiling, which involves all the same risks as a government closure. When Social Security checks don’t arrive and soldiers on active duty don’t get paid, voters get angry. That explains why Republican leaders want a debt-limit increase that lasts until after the 2014 congressional elections. What’s more, Republicans don’t seem to really want to attack Medicare and Social Security a year before the midterms.

Come September, then, the real fight will be over how much more marginal savings can be wrung from domestic programs. It will be a game of small ball, with a savings target of about $200 billion in a federal budget of $3.8 trillion. The funds will probably come from farm subsidies, fees charged for government services, increased cost-sharing by wealthier Medicare recipients, and possibly a switch to a cost-of-living formula that slows entitlement-spending increases.

Both sides will seek to replace some of the automatic spending cuts in Pentagon programs. Yet most 2014 spending would continue at the sequester level, allowing lawmakers to claim they ended the mindless cost-cutting while still counting the savings.

The first move will be made by House Appropriations Committee Chairman Hal Rogers of Kentucky, who will press for a one- or two-month extension of government operations, pushing off the Sept. 30 deadline. The battle over the budget will then coincide with the battle over the debt ceiling.

But even that isn’t as scary as it sounds: The strategy is political survival in 2014, and that means keeping the difficult votes to a minimum. A single vote to raise the debt ceiling, end sequestration and trim the deficit allows lawmakers to claim they stuck to their principles -- without raising taxes or harming the investments needed for the economy of the future. If you want to judge the results for yourself, watch what they do, not what they say.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at